An example of a productive investment may be a machine that enables a new design of metal fasteners to be produced from less metal, and with less labour time, but is equally as strong. In this case we have a productivity gain in terms of materials and human labour time for the same output. This investment allows use to produce more fasteners in future periods even with no more inputs.

Housing does nothing of the sort. It simply houses more people and does nothing to improve the per capita productivity.

Let's use a little thought experiment to prove the point.
Imagine an island nation of 1000 people occupying 400 homes. The only production activity on the island is the making of nails from raw metals – an activity in which everyone participates. The metal is imported and the nails exported, and the income generated from the sale of nails is used to import all other goods required by the people. With present techniques each person can produce 500 nails per kilo of raw metal per week.

The people of the island breed and accept some immigration until the population reaches 1250. They begin to get cramped and decide they best build some more houses. 400 people spend a year of their time constructing the 100 new houses, and expanding the factory, before all 1250 return to the nail trade.

After all this population growth and a massive investment in housing, equivalent to 20% of the existing stock (along with a massive investment in new factory space) each person can still only produce the same number of nails per unit of labour time and per unit of raw metal. There are no productivity gains from any investment.

In fact this growth has been costly. It took 400 people out of production for a year to build the new homes and extend the factory – a loss of 10 million nails (10,000 per original occupant or 5 months of work) that cannot be recovered.

If our island nation had instead invested in better production techniques such as automation, specialising the use of labour for particular parts of the process, or even invested the time to redesign the nails to be easier to manufacture with less material, they would have had productivity gains.

The most popular claim by property spruiker is that housing is productive because it produces this thing called ‘somewhere to live’. Clearly there is a misunderstanding of productivity here. Tomatoes produce something to eat, as do bananas, which are equally as important as shelter. But it doesn't mean that growing a tomato improves our productivity.

The second most overlooked issue is that even if you redefine the argument to say that productive investment is any investment in capital that enables future production, which is the case for housing because homes enable future production of occupied space, you can easily overlook the fact that there are varying degrees of productivity of an investment. Housing productivity is clearly extremely low, with net rental returns (the measure of the future production you are enabling), around 2-3% in most areas.

Of course, property spruikers will still tell you that capital growth proves their point about relative productivity, but in the current financial climate, I would say there is still time to learn about the fragility of asset prices and the disconnect between the current price and the true productive contribution of the asset.

Well the Christian allow me to do the honours today. the question - does housing improve productivity ?

Well more housing will house more workers and that could well increase overall productivity, but I believe that housing ALLOWS increased productivity. Try expecting a worker to perform at his/her best when they are not being cared for in terms of basic necessities such as food shelter and clothing. Without these building blocks society would soon crumble and we would be retracing steps not taken since the dark ages.

Sorry Cameron you have been unproductive by counting non existent nails - I don't share your convoluted view that housing must not be productive, AND I don't share your narrow view that an investment in housing is necessarily at the expense of all other forms of investment in production.

I'll leave Cameron to argue his nail example and it's relevance but I do have a couple of general points:

Firstly - does housing equal shelter? There are plenty of examples of perfectly useful houses being demolished to rebuild housing which, although "newer" and more "modern", shelters the same number of people. Isn't that a comparitive waste of resources as Cameron's basic example shows?

Secondly, Australia spent much of the decade dramatically reducing the public debt and privatising many utilities - eg telstra etc. An economic reason noted was it helped reduce the "crowding out" effect on private borrowing. Couldn't it also be argued that mortgage debt is now crowding out some potentially more productive business investment borrowing since it makes up ~60% of the private Australian debt profile (exprapolated from the debt by sector graph - http://www.keenwalk.com.au/)

To draw an analogy to clothing, another basic human need to which you are comparing housing -Should we all invest in more clothing than we need by leveraging and borrowing against our exisitng clothing? we'll need to clothe the growing population too....?

Hmmm - Christian - you demonstrate that you are a wise man by leaving Cam to his nail business. Still there is money in cuticles if he just changed tack a little (apologies for the bad puns)

Firstly - Yes I would argue that housing is shelter, although as you correctly point out there is waste. Exactly what constitutes waste is more difficult to define. I argue that building being demolished because they are now unsafe or unfit is not a waste, and building being demolished to make way for dense habitation is also not a waste, but clearly we have all seen examples of demolition for the sake of cosmetics. However when I drive around the suburbs I am not struck by the high number of homes being demolished. Are you ?

Secondly - that horrible privatisation phase that we went through, really just transferred a large portion of debt from public to private. Only the ownership of debt changed (and the assets as well).

The second part of this question is more interesting. I will agree that there must be a portion of the housing debt that is wasteful, but the majority of it is necessary to provide basic shelter. Yes perhaps more finance should have been directed at the business sector, but much of the large corporate borrowings is now being funded via equity raising through share offers, or direct to the market and traditional lenders are being left out of the big end of town market.

I think this part of you question require a lot more research and analysis that either you or I have the time for. Perhaps it would be a good project for Cam, but given his anti property bias I wonder at the conclusion.

Government policy also has a part to play. If policy ensures the safety of lending for housing without any additional incentives for business and commerce lending, is this not the fault of policy makers who should have kept this under closer review.

Clothing - too late we already have more clothing than we need - check out your wife or girlfriends wardrobe, shoe collection, handbag collection etc, and the dreaded credit card balance for the leverage.

The R/E sector gets its fair share of critics for the selling tactics used, but in reality it is no more shameful than the merchants of clothing, perfumes, cars, travel packages, Flat Panel televisions, natural healing lotions, coca cola, or any other product advertised on television or in magazines.

Housing is a consumer item. It is consumed (albeit over a very long period). The misunderstanding that it is a productive resource comes from the fact that it gives people shelter, and people are productive. But foods gives people energy, and to say that food is productive would be strange.

Land, on the the other hand, is not consumed. But I would argue very strongly with anyone who thinks we need to invest in land. The amount of land that will ever be used is already in existence. In the last 10 or so years in Australia, private individuals have used easy credit to bid up the price of the land that we already owned. This cannot be claimed as productive. In fact, it simply crowds out borrowing for real productive activities, and resulted in us having more debt, but the same amount of land as before. Unfortunately, the government actively encouraged this wastefulness through its policies.

I think healthy debate on the housing issue is encouraged on this blog, and Peter, its good to hear you express your opinion here to generate some debate.

I dont think there is a right or wrong but I strongly believe Australia is heavily overbalanced toward housing investment at the expense of other more productive investment at this moment. I believe this has been encouraged by a number of poor policies including the First Home buyers grant and has led to the point now where the house/land bubble is self fulfilling.

On another note for another blog perhaps, I also believe that Australia has not shaken the old colonial mindset of being a pure exporter of ag/mineral resource products. Once we learn that there are better methods of generating GDP that do not involve digging up minerals, cutting down trees or shipping out wool then I believe we can move toward a better balanced economy.

Right now you can't argue with the numbers but that does not justify it being a rational situation. Markets have been know to stay irrational for long periods.

Hi Christian - Cam has some entrenched views that are probably a result of his own situation, but I do commend him on a recent remark he made on CJ's blog regarding a recent messy tiff with Sayce.

This debate was on the statement that "housing is unproductive" which of course is rubbish. Your argument appears to be that housing is less productive than other forms of investment. I can't argue with that.

On your second (and off topic) point, our population is too small to create an efficient domestic market and we are too far from the rest of the western world of consumers to really be able to establish a decent manufacturing base of any worth. We are also too close to Asia where they can produce anything at a fraction of the cost that we can. As a case in point I am currently importing LED lights for my own personal domestic needs for about $8 AUD per unit landed in Brisbane, against a local cost of $25 to $45 per unit for an inferior product. Source of product - Shenzen, mainland China.

We are just out of the loop, simple as that. I would not like to see us take the protectionist route, but as our population increases we do need to give thought to what we are going to do post resources boom.

what about the productivity gains in the construction of new homes. The more they do, improvements can be learnt to increase output with a given amount of inputs or use less inputs to produce the same output.

Also, why do you assume that the h/h population will continue to remain at 2.5 per h/h? It may be that as the cost of homes becomes to high, people will share, stay at home longer or joint purchase homes, thereby increasing the h/h population.

Also, even though you assume there would be 400 people off building homes, why did you assume that the remaining 850 would continue to produce the same no of output? Maybe they would learn to be more productive or they would work back to ensure the same level of production occurred.

Regards to Peter's comment, it may be that some foods provide more energy than other foods and therefore a productivity improvement may occur if more of the food with the higher energy is produced and consumed (assuming this food uses the same inputs as in its otherwise production). Further if shelter provided by a home provides for people to rest better than would otherwise be the case, it could be argued that this could lead to a productivity improvement to their labour.

Regards to a comment by Christian. I agree, the subsidies provided in the form of First Home Owner's Grant were/are inefficient as they distort consumption patterns and as such distort prices, which will in turn distort the allocation of resources towards more efficient production into the production of subsidised housing.Merry Christmas, Chris